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TMI Blog2021 (10) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 clarifying that keeping in view the legislative intent to apply anti-abuse measures, Section 56(2)(viia) of the Act shall not be applicable in case of receipt of shares as a result of fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares. The said circular was withdrawn immediately vide another Circular No.02/2019 dated 04/01/2019 and new Circular No. 03/2019 dated 21/01/2019 was issued wherein it was mentioned that the view taken in Circular No.10/2018 (subsequently withdrawn by Circular No.02/2019) that section 56(2)(viia) of the Act would not apply to fresh issuance of shares, would not be a correct approach, as it could be subject to abuse and would be contrary to the express provisions and the legislative intent of section 56(2)(viia) or similar provisions contained in section 56(2) - the fact that intent of introducing the provisions was anti-abusive measures still remain intact and there is no reason to depart from the understanding that the provisions were counter evasion mechanism to prevent laundering of unaccounted income. Additions as made by AO in the assessment order are not sustainable in the eyes of law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is substantially due to inaction on part of his relatives to exercise the right issue of shares offered to them and that the addition made to that extent ought to have been excluded from the rigors of section 56(2)(vii)(c)(ii) of the Act. As evident, the sole subject matter of dispute is addition as made by Ld. AO u/s 56(2)(vii)(c)(ii). The assessee being resident individual is stated to be director and a major shareholder in an entity namely M/s Kennington Fabrics Private Limited (KFPL). 1.3 The Ld. AR as well as Ld. CIT-DR advanced arguments along with written submissions. Reliance has been placed on various case laws. The Ld. AR has submitted that the case is squarely covered in assessee s favor by the decision of this Tribunal in Sudhir Menon HUF V/s ACIT (45 taxmann.com 176) and various other decisions. The copies of the same have been placed on record. The Ld. CIT-DR, on the other hand, controverted the arguments put forth by Ld. AR. 1.4 We have carefully heard the rival submissions and perused relevant material on record. The judicial pronouncements as cited during the course of hearing have duly been deliberated upon. Our adjudication to the subject matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered on right basis by KFPL on proportionate basis to all existing shareholders. The assessee subscribed to the right issue only to the extent of proportionate offer and no further. The attention was drawn to CBDT Circular No. 5 of 2010 dated 03/06/2010 which provided that the newly introduced provisions of Sec. 56(2)(vii) were anti-abuse measures. Similarly, CBDT Circular No.1 of 2011 provided that these provisions were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent was not to tax the transactions entered into the normal course of business and trade, the profits of which are taxable under specific head of income. 3.2 On the strength of these arguments, the assessee submitted that initially it was holding 87.50 Lacs shares which constitute 90.37% shares of KFPL. During the year, vide board resolution dated 09/08/2013, the shareholders holding 7 shares were offered 8 shares at a price of Re.1/- per share. Vide another board resolution dated 06/03/2014, the shareholders holding 5 shares were offered 8 shares at price of Re.1/- per share. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.70% Total 96,76,746 100% 4,98,02,402 100% 3.3 On the basis of above tabulation, it was demonstrated that the assessee was offered shares only as per his proportionate entitlement and nothing more and therefore, in terms of the cited decision, the provisions of Sec.56(2)(vii) were not attracted. It was further argued that it was not a case of tax evasion or money laundering but a pure genuine commercial arrangement in the normal course of business. The intention of the provisions was to check evasion of tax and the provisions were introduced as anti-abuse provisions. The amendment was introduced to overcome the money laundering activities undertaken on abolition of Gift Tax Act; Since the Gift tax Act was not applicable to issue of shares, the provisions of Sec.56(2) would not apply to transaction of such nature as per the decision of Bangalore Tribunal in DCIT V/s Dr. Rajan Pal (ITA No.1290/Bang/2015). Another argument was that that the provisions of Sec.56(2)(vii) would be applicable to recipient of the property or money. Such property includes sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of diminution in the value of the existing shares held by the assessee. 3.5 In the alternative, the assessee submitted that the addition was to be restricted only to disproportionate allotment of shares to assessee and after factoring in the value of the existing shares which would be 150.87 Lacs as tabulated on page nos. 24 and 25 of the appellate order. 3.6 Finally, the assessee summed up the arguments as follows: - (i) The provisions of section 56(2)(vii)(c) of the Act should not be made applicable to a genuine transaction of issue of shares having regard to the purpose of introduction of the said section. (ii) The section applies only where the property (in existence) is received by the appellant and not at the time where the property comes into existence. (iii) The appellant cannot be fastened with liability of taxation based on action or inaction of a third person when a proportionate / equitable offer was proposed to each shareholder and shares were allotted as per their proportionate eligibility only. (iv) Without prejudice, the addition if any has to be computed proportionately based on the rationale of the Hon'ble Mumbai ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is clear fallacy in the conclusion of lower authorities that the allotment was dis-proportionate and skewed in favor of the assessee in view of the fact that assessee s shareholding increased from 90.37% to 96.88% at year end. The said conclusion has overlooked the fact that there were two right offers during the year and the right issue was offered, on both occasions, to existing shareholders in the ratio of 7:8 on first occasion and 5:8 on the second occasion. The issue was offered to existing shareholders in proportion to their holding at the same price i.e. Re.1/- per share. The same is supported by Board Resolution dated 09/08/2013 and 06/03/2014 and this fact is nowhere in dispute. The assessee subscribed his entitlement but the other shareholders did not subscribe to the entitlements. Resultantly, the assessee s overall holding increased at year-end and the holding ratio got skewed in assessee s favor. The said conclusion is duly evidenced from assessee s tabulation during appellate proceedings as extracted by us in preceding para 3.2 of the order. This being so, the ratio of decision of Mumbai Tribunal in Sudhir Menon HUF V/s ACIT (45 taxmann.com 176) would be appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income.... On the basis of the same, it could be inferred that provisions of section 56(2)(vii) were introduced as an anti-abuse measure and to prevent laundering of unaccounted income under the garb of gifts, after abolition of the Gift Tax Act. Upon perusal of orders of lower authorities, we find that there are no such allegations and no case of tax evasion or tax abuse has been made out against the assessee. In fact, the transactions are ordinary transactions of issue of right shares to existing shareholders in proportion to their existing shareholding and therefore, no case of abuse or tax evasion could be made out against the assessee. 4.4 This proposition is supported by the fact that in line with the intent of legislatures, CBDT issued another Circular No. 10/2018 on 31/12/2018 clarifying that keeping in view the legi ..... 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